Card Settlement Brings Peace to Payments

The longstanding dispute over credit card fees and payment practices appeared to come to a close last week when the U.S. District Court for the Eastern District of New York announced a preliminary settlement in a dispute between retailers, the major card brands and at least nine major card issuers.

At its heart, the complicated dispute addressed both the rules under which the card brands insisted retailers accept their cards as well as the fees they paid for that acceptance. If approved, the settlement will see $8.25 billion eventually move from the card brands and major card issuers into the coffers of participating retailers as well as give retailers the right to levy a surcharge on card transactions.

Even though the settlement requires substantial sums of money from the payments industry and threatens to undercut credit card interchange in the future, reactions from bankers the major card brands and industry coalitions to the settlement were largely favorable and drew a contrast between this settlement, which had been worked out in a lengthy legal process, and the Durbin amendment.

“The long political conflict over interchange fees is finally over, settled by a well-established legal process, which brought together retailers and the card industry for a negotiated resolution,” said a spokesman for the Electronic Payments Coalition, an association of card brands and issuers, including credit unions, that was formed to oppose changes to the card interchange system.

“The deliberate and measured approach of the settlement process is in stark contrast to that of the Durbin amendment, which was passed in the dark of night with no review of its consequences and virtually no public debate,” the EPC added. “These government price controls shifted $8 billion from banks to the retailers with no evidence that consumers are seeing lower prices as a result. All parties have endorsed this agreement. The legal process worked and should send a signal to Congress that it is wrong to pick winners and losers in a complex dispute between two industries.”

American Banking Association CEO Frank Keating echoed the EPC with similar thoughts.

“Let’s be clear–retailers, not consumers, benefit from today’s resolution,” Keating said. “This settlement even provides merchants with the ability to impose ‘checkout fees’ on customers just for using credit cards. This type of behavior is nothing new for retailers. Even after receiving an $8 billion annual windfall from the Durbin amendment, they refused to pass along promised savings to customers and sued the Fed for even more profits. These types of issues are best resolved by market participants. Recent history illustrates the negative consequences for consumers when policymakers choose winners and losers and distort the marketplace An excellent example is the ill-conceived passage of the Durbin amendment, which led to increased profits for big-box retailers and no savings for consumers.”

“Only time will tell if this history will repeat itself, as retailers continue to show little regard for consumers. While the banking industry may not like all the results in this case, our industry is ready to put this matter behind us and continue playing a critical role in our nation’s economic growth and job creation,” he added.

By contrast, CUNA and NAFCU were more restrained in their comments, reflecting the fact that, unlike in the fight over the Durbin amendment, credit unions did not play as key a role in this litigation. Although credit unions were not directly involved in the settlement, they have been members of different payment industry coalitions that were formed to protect credit and debit card interchange and which have had input into the settlement.

CUNA CEO Bill Cheney emphasized that the settlement ends a longstanding dispute in the payment industry.

“Importantly, this settlement means the issues in this case are now closed, once and for all. Even though consumer-owned credit unions were not part of the lawsuit, the settlement announced today affects all credit unions with credit card programs. We all know that interchange revenue enables credit unions to provide essential and cost-effective credit card services to their consumer members. We also know that the temporary reduction in interchange revenue that credit unions will experience will not likely find its way into the pockets of consumers but will more likely into those of merchants. Consumers win nothing in this settlement.”

NAFCU was a little more pessimistic.

“It’s a shame that once again consumers stand to see their wallets shrink with the risk of new check-out fees, instead of the once-promised price cuts, as the big-box retailers continue to get richer,” said NAFCU CEO Fred Becker, adding “We continue to monitor developments for any potential ramifications on credit unions.”

Meanwhile, payment industry analysts largely have said it is too early to know how the settlement will impact the use of cards and thus credit union card income. First, many estimate that getting the details to the settlement worked out could take between eight months and a year. Second, it’s unclear how many retailers will really levy a surcharge credit cards purchases. Analysts point out that the decision demand such a charge or not can be especially difficult as it pits the merchant’s desire to avoid spending more to process the transaction against the consumer’s desire for more convenience in payments and the well-documented trend among consumers to spend more when paying with a card.